Role of domestic manufacturers in defence sector vital: analyst

Amrita Nair Ghaswalla Mumbai | Updated on January 22, 2018 Published on November 04, 2015

With India’s defence offset projects set to cross $35 billion, thesewould be a significant opportunity to provide a growth impetus

Exemption of duty, tax benefits will boost efficiency

The Defence Acquisition Council, the apex decision making body of the Defence Ministry, has been aggressively clearing orders for defence ware since last year.

With India’s defence offset projects set to cross $35 billion in FY16, powered by ‘Make in India’, defence offsets would be a significant opportunity for India to provide a growth impetus, according to a senior analyst.

Kabir Bogra, Associate Partner, Khaitan & Co, pointed out that a committee of experts had recommended changes to the 2013 Defence Procurement Procedures.

Strategic model

Bogra said the partial liberalisation of Foreign Direct Investment (FDI) caps and simplification of the industrial licensing process, were both intended to encourage original equipment manufacturers (OEMs) to engage in more meaningful partnerships with the Indian industry, and not merely use it for low-end manufacturing tasks. The committee has suggested a strategic partnership model for the development of critical platforms like aircrafts, warships, armoured fighting vehicles, etc.

While a specially instituted task force would select an Indian Strategic Partner (SP) for the development of a particular platform, Bogra said the SP would participate as a prime contractor in government-to-government negotiations with foreign OEMs.

Bogra, who heads the defence practice at Khaitan & Co, said the committee has made recommendations to improve the extant defence procurement procedures “with the overall objective of increasing participation of domestic private firms”. The committee has recommended elimination of the inverted duty structure on inputs for defence items, along with extension of tax benefits to the defence sector.

“Extending the deemed export status to supplies from Indian offset partners is set to promote competitiveness of the domestic industry. This is expected to improve cost efficiency of manufacturers on account of exemption from custom duties,” said Bogra.

‘Industry-friendly steps’

Implementation of several pro-investment steps, including single-window clearance for defence exports, easy availability of export licences, extended line of credit, relaxation of end user certification requirements, among others, were industry friendly measures, he added.

Commenting on two amendments made to the DPP 2013, the expert said that allowing exchange rate variation protection and flexibility in designating Indian offset partners were key changes.

Considering the long gestation period involved in the creation of facilities and infrastructure for proper absorption of transferred technology, OEMs have been allowed a minimum of 10 years for discharge of offsets.

“A vendor had fewer options earlier. He could choose to give the offset plan at the time of the submission of the bid, or give it one year prior to discharge. Now, the government has provided more flexibility,” said Bogra, adding that delays would incur severe penalties.

The introduction of exchange rate variation protection for Indian vendors and sub-vendors has already been effected by the Ministry of Defence.

Bogra added, “Defence has high import content. With the rupee tumbling, the exchange rate variation has been extended across all categories.”

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Published on November 04, 2015
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